The four Labour Codes in force: the 50% wage rule, fixed-term gratuity and what changed for payroll

Where things stand (27 September 2026)

The Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020 and the Occupational Safety, Health and Working Conditions (OSH&WC) Code 2020 were brought into force on 21 November 2025. Together they replace 29 central labour laws, including the Minimum Wages, Payment of Wages, Payment of Bonus, EPF, ESI, Payment of Gratuity, Maternity Benefit, Industrial Disputes, Factories and Contract Labour Acts.

• 30 Dec 2025. Draft central rules published.
• 8 May 2026. Final central rules notified under all four Codes, starting with the Code on Wages (Central) Rules 2026 (G.S.R. 343(E)) and the Social Security (Central) Rules 2026 (G.S.R. 344(E)). They supersede the legacy central rules.
• 1 Jul 2026. New EPF, EPS and EDLI Schemes in force.
• Savings window. Section 164 of the Social Security Code keeps older regulations operative for up to one year, to 20 November 2026, unless they are replaced earlier. The ESI (General) Regulations 1950 rely on this window.
• States. The picture for state-sphere establishments is mixed. Karnataka, for example, published draft rules under all four Codes on 23 January 2026, and none had been finalised by the date of this note. Until a state finalises its rules, its legacy forms and registers usually continue in practice.

State Professional Tax, Labour Welfare Fund and Shops & Establishments laws are not replaced by the Codes.

The single definition of "wages" and the 50% rule

Section 2(y) of the Code on Wages and s.2(88) of the Code on Social Security share one definition. Wages means all remuneration expressed in money, and includes basic pay, dearness allowance and retaining allowance. It excludes a closed list of items:

• HRA
• conveyance and travel concession
• statutory bonus
• overtime
• commission
• the employer's PF and pension contributions
• gratuity
• retrenchment compensation
• the value of house accommodation and amenities
• a few others

The first proviso is the 50% rule. If the excluded items exceed 50% of total remuneration, the amount above 50% is added back to wages. Remuneration in kind of up to 15% of wages is also counted as wages.

This one number now drives PF (up to the ceiling), ESI, gratuity, bonus and several leave and overtime computations.

Worked example: a ₹60,000-a-month structure

Reading 1: special allowance is wages. It is not in the exclusion list, and it is a fixed allowance paid for work. Wages are 20,000 + 20,000 = ₹40,000. Excluded items total ₹20,000, which is 33% of pay and below 50%, so nothing is added back. Wages = ₹40,000.

Reading 2: conservative engine logic. Only basic, DA and retaining allowance are treated as wages, and everything else as excluded. Excluded items total ₹40,000. The 50% threshold is ₹30,000, so the excess of ₹10,000 is added back. Wages = 20,000 + 10,000 = ₹30,000.

Under either reading, wages cannot fall below half of total pay. What the change costs you depends on the item:

Two lessons follow. First, gratuity is the biggest long-term cost, because it has no wage ceiling below the ₹20 lakh cap. Second, where special allowances have been used to keep basic low, treat them as wages unless you have advice to the contrary.

Many employers have rebased basic plus DA to 50% of fixed pay, so the add-back never bites and the computation stays auditable. If you do this, check the effect on HRA exemption, which is linked to basic plus DA, and on CTC letters.

Gratuity: fixed-term employees after one year

Under Chapter V of the Code on Social Security:

• Permanent employees: gratuity after 5 years of continuous service. The requirement is waived on death or disablement.
• Fixed-term employees: gratuity pro rata after 1 year of continuous service.
• Working journalists: 3 years.
• Formula: 15/26 × last drawn Code wages × completed years. A part-year of more than six months counts as a full year. Seasonal establishments pay 7 days' wages per season.
• Ceiling: ₹20 lakh. This is also the tax-exemption limit.
• Payment: within 30 days of becoming payable. Interest runs after that.

Example. A fixed-term contract runs 1 year and 8 months, and the last Code wages are ₹30,000. The 8 months exceed 6, so on the usual rounding rule the service counts as 2 years. Gratuity is 15/26 × 30,000 × 2 = ₹34,615. Under the old Act this employee would have received nothing.

Fixed-term workers must also get the same hours, wages, allowances and benefits as comparable permanent workers.

What changed for payroll: the checklist view

Wages and payment (Code on Wages)

• Minimum wages apply to all employees, not only scheduled employments.
• Central rules fix minimum wages per day. The monthly rate is the daily rate × 26 and the hourly rate is the daily rate ÷ 8. The central VDA is revised on 1 April and 1 October.
• The statutory national floor wage has not yet been notified. The exercise began in July 2026.
• Monthly wages are paid by the 7th of the following month.
• On resignation, removal, dismissal or retrenchment, wages due are paid within 2 working days.
• Total deductions are capped at 50% of wages.
• Overtime is paid at twice the ordinary rate.
• A wage slip (Form V) is issued on or before pay day.
• Bonus is now in Chapter IV of the Code on Wages. Eligibility up to ₹21,000 and the calculation ceiling of ₹7,000 or the minimum wage, whichever is higher, were re-notified on 25 Aug 2026.

Social security (Code on Social Security)

• PF and ESI are computed on Code wages.
• The PF ceiling is ₹25,000 from 17 Sep 2026. The ESI ceiling is unchanged at ₹21,000.
• Common registration of establishments now runs through the Shram Suvidha portal.
• Aggregators have obligations for gig and platform workers.
• Records are kept for 5 years.

Industrial relations (IR Code)

• Standing orders are mandatory at 300+ workers.
• Prior permission for lay-off, retrenchment and closure is required at 300+ workers (earlier 100).
• On retrenchment, a Worker Re-skilling Fund contribution of 15 days' wages is due within 10 days.
• Fixed-term employment is recognised across all sectors.

Working conditions (OSH&WC Code)

• The limit is 8 hours a day and 48 hours a week, with state flexibility on spread-over.
• Annual leave is earned at 1 day per 20 days worked, with eligibility after 180 days (earlier 240).
• Appointment letters are mandatory.
• Contract labour now sits in the OSH Code. Contractor licensing starts at 50 workers and principal-employer registration at 10.
• Central-sphere establishments file a unified annual return.

What employers should do

• To do: Map every pay component to "included", "excluded" or "unclear", and document your reading on special and other allowances.
• To do: Run the 50% test for every employee each month in payroll, not just at annual restructuring.
• To do: Recompute gratuity provisions (Ind AS 19 / AS 15 valuations) on Code wages, including fixed-term staff after 1 year.
• To do: Move full-and-final payments to a 2-working-day process.
• To do: Update wage slips, registers and appointment-letter templates to the central rules' formats (central sphere) or to state formats until state rules are final.
• To do: Track your state's rules. Karnataka, Maharashtra, Tamil Nadu and others are at different stages.
• To do: Watch 20 Nov 2026, when the s.164 savings window closes for the old regulations.

Effective dates at a glance

General information, not legal advice. Last reviewed 27 Sep 2026.